According to “Effective Due Diligence for Guaranteed Lifetime Income Options,” while GLIOs are gaining momentum in certain segments of the market and more benefits professionals are becoming aware of them, adoption remains relatively low today. However, IRIC contends that moving forward, there are many signs that adoption will increase as GLIOs offer undeniable appeal for employers looking to strike a balance between the cost and security of defined benefit plans and the higher risk of self-directed plans.
The report said for such companies, the central issues then become:
- Are GLIOs right for some or all of our workforce? If so, which type of solution is right for us, and is only one provider enough?
- What is the impact on plan design and administration?
- Given our objective, what is the best way to offer a solution like this to encourage appropriate utilization?
The report suggests that to determine if adding GLIOs should be a priority, plan sponsors should consider a few basic qualitative issues, such as workforce risk profile and sophistication, participants’ current investments, current saving levels, appetite for portability and the overall need for long-term income replacement. Generally speaking, GLIOs are a better fit for companies with income replacement needs beyond Social Security and/or remaining defined benefit plans, IRIC contends.
It also may be risky to offer these options without considering how much education is necessary for the workforce and retiree population. Inclusion of GLIOs may lead some employees to “accidentally” pick the option based on the attractive-sounding name without considering the potentially higher fees and/or actual income replacement needs. As such, the financial IQ of employees (including their ability to understand the benefit, compare it to other options and match it to their unique needs) should be factored into initial and ongoing participant education.
Another important consideration is the employer/employee relationship, according to the report. To some extent, that is a question of company culture. Is the employer/employee relationship protective, with strong advice and guidance offered (either directly or through third-party advisors)? Or is the emphasis on “do-it-yourself” planning? These types of cultural questions are often afterthoughts when fund and investment choices are made, but they are important factors in the evaluation of GLIOs.
A plan sponsor will also want to consult with its plan provider or administrator to determine if adding a GLIO will subject their plan to additional rules. For example, the reports says there was a recent Private Letter Ruling (PLR 201048044) issued by the IRS that implies that guaranteed withdrawals under some GLIOs constitute a “life annuity” for purposes of the qualified joint and survivor rules, which may require additional compliance considerations such as obtaining spousal consent for certain distribution options.The Issue Brief can be viewed from http://iricouncil.org/thought.